I HOLD THIS TRUTH TO BE SELF-EVIDENT, THAT A DEBT CRISIS CANNOT BE RESOLVED WITH MORE DEBT

Wednesday, April 1, 2009

On Markets: Five Laconic Points

Financial markets have discounted a grim global future similar to the Great Depression. Just look at share prices or credit spreads. Speculators have switched heavily to shorting.

However, this is NOT the 1930s - no gold standard, more international financial and political co-operation, better understanding of monetary economics.

In combating the crisis the Fed and Treasury have provided, loaned or guaranteed $13 trillion in new funds - equivalent to nearly 100% of US GDP. This enormous peacetime economic intervention is completely unprecedented in size and scope. It will have an effect.

22 comments:

And I guess you just assume that all the bailouts, rescues, credit facilities, taking on of junk assets for swaps, ZIRP, stimulus packages, etc.. will have ZERO unintended consequences?

That the fed will perfectly and neatly take back the credit facilities and that there will be no problems borrowing funds by issuing treasuries to support these policy actions with very low rates? That there is no chance of a whiplash effect at the tail end of this?

This is a great example of ignoring the side effects of these actions, ignoring that higher quality debt classes are deteriorating much faster than originally thought, that consumers are spending again, that debt can easily be rolled over, etc..

Just ignore what possibly COULD go wrong, and focus on how it MAY go right. Yea, perfect investing advice.

The Fed and Treasury are combating big deflation right now. So far, they have just "printed" money to replace what has been "torn up" by debt destruction and mark to market losses. That's in no way inflationary.

What happens next? I don't know and I'm pretty sure Bernanke & Co. don't know either. This has never been attempted before.

You are right on everything up to the last sentence, "markets have overly discounted on the downside." Look at the balance sheets and corporate borrowing costs. Once unemployment rises, there will be a lot more bankruptcys and lower stock prices for those that remain muddling through. Otherwise, agreed; the one downer compared to the 1930's is that there are a lot more urban dwellers than in the 1930s and moeurs have certainly declined for the population as a whole. This could lead to a lot of civil unrest. Let's hope not.

Well, I thought "hmm mhm hmm WTF sounds almost like Ben himself wrote it!?", and then remembered about the good old april fools day... To avoid confusing any future readers trying to read past material, you better add "Ha ha, suckerz" or "No, I'm serious. Signed 02.04.2009"! :)

Hel,May I recommend this article by Mike Hudson which presents a strong case for the destabilizing effects of $flows (and the consequent foreign push back) which may impact on your assessment of economic recovery:

http://www.counterpunch.org/hudson03302009.html

If the US can't continue to enforce acceptance of the $, will that affect your outlook?

Sorry, I had a Debra moment and showed some French, I could swear mores was spelled like that when I grew up. Anyway mores are cultural habits, courtesy, ways people interact, moral and immoral behavior, all of which have declined. Thanks for catching the mistake.

I'm totally clueless as to where markets are going. I think in this environment you have to learn to change your mind a lot, and adjust your thinking. I think the bears that think the world is coming to an end are wrong. This is not WW3, and to me the worst case scenario is living like the Japanese for 25 years. Which would be an upgrade considering how well they live. On the other hand the people that think we are going to recover from this fast are probably wrong because so many Americans are deeply in debt and it will take time to repair that.

Personally, I'm comfortable going long stock when the Sp500 was around 700. When it goes back there again I'll be picking up more shares.

I know that there are times when I am an incorrigible pessimist, but I think that heads are going to roll.Perhaps FIGURATIVELY...But heads are going to roll.And I'm not sure that things are going to get any better until TRUST emerges, which I do not see happening in all of this."Moeurs" is just fine by me.I think that a smattering of ANY foreign languages in this blog will do wonders to improve our global understanding, and reduce U.S. EXCEPTIONALISM, if you see what I mean.

About Me

I was educated as a chemical engineer but spent almost my entire career in finance, particularly in money, FX and bond markets. The name stands for Hell-as-IOUs and the picture points to Quixotic endeavors.